Tuesday, July 28, 2015

“Independent Contractors” May Not be Independent Enough

On July 15, 2015 the U.S. Department of
Labor (DOL) issued Administrator’s Interpretation No.
2015-1 to
address the “problematic trend” of employers wrongfully classifying workers as
independent contractors instead of as employees. (In fact, the Interpretation finds
that the bulk of workers currently classified as independent contractors actually
should be employees.) Based on the Fair Labor Standards Act’s broad definition
of “employ” as “to suffer or permit to work,” 29 U.S.C. 203(g), the Interpretation
re-emphasizes that the appropriate test for determining worker classification is
the “economic realities test,” and not the common law control test. While the
common law control test is based on the employer’s control over the worker, the
economic realities tests takes a broader approach by looking at six different factors:

(A) the
extent to which the work performed is an integral part of the employer’s
business;

(B) the
worker’s opportunity for profit or loss depending on his or her managerial
skill;

(C) the
extent of the relative investments of the employer and the worker;

(D) whether
the work performed requires special skills and initiative;

(E) the
permanency of the relationship; and

(F) the
degree of control exercised or retained by the employer.

The ultimate
question, however, remains whether the worker is economically dependent on the
employer. Accordingly,
the DOL emphasizes the importance of considering the totality of the factors
without applying undue weight to any single factor: “in undertaking this analysis, each factor is examined and analyzed in
relation to one another, and no single factor is determinative. The ‘control’
factor, for example, should not be given undue weight.” Administrative
Interpretation at 4. The result is a legal shift in who qualifies as an
employee.

For example, the Interpretation
examines a hypothetical construction company whose business is framing
residential homes. By definition, carpenters are integral to such a business.
The Interpretation’s implication is that carpenters working for this construction
company should not be classified as independent contractors. In contrast,
the same construction company may hire a software developer to create software
that, among other things, assists the company in tracking its bids, scheduling
projects and crews, and tracking material orders. However, the software
developer is not performing work that is integral to the construction company’s
business, and therefore may be an independent contractor. Administrative
Interpretation at 7.

The Interpretation also examines a
hypothetical cleaning service worker to illustrate the third factor, “relative
investments of the employer and the worker.” Under this factor, a cleaning
service worker who is annually issued a 1099-Misc form (for independent
contractors), but who uses company-issued supplies, a company-issued car, and who
serves clients solicited by company-paid advertising is an employee. However,
the same cleaning service worker can become an independent contractor if he or
she invests a commensurate amount into the company. For example, if the worker
invests in a vehicle that is not suitable for personal use and uses it to
travel to various worksites, or if the worker rents his or her own space to store
the vehicle and materials, or if the worker also advertises and markets his or
her services and hires a helper for larger jobs, then the worker could be
properly classified as an independent contractor. This is because the worker’s
investment in the job is similar or greater than the investment of the company.

While the DOL’s interpretation is not
legally binding, it is important because courts give great deference to an
agency’s interpretation of a statute which it enforces. The Administrative
Interpretation broadcasts the DOL’s commitment to reversing the problematic trend
of misclassifying employees, with likely far-reaching impact. The correct
classification of workers has critical implications in terms of legal
protections that workers receive, particularly for misclassified low-wage
workers, and especially as more local and state legislatures advocate for substantial
minimum wage increases. In addition, while misclassified workers raising
concerns about FLSA compliance are protected from retaliation under FLSA’s
anti-retaliation provision at 29 U.S.C. 215(a)(3), it is unclear under the
DOL’s new guidance whether courts will allow the same protection for an worker
who is eventually determined to have been properly classified as an independent
contractor. On other issues, for example in whistleblower retaliation cases,
courts have used the “reasonable belief” standard to assess the scope of
protection, rather than focusing on any actual violations. See, e.g., Darveau v. Detecon, Inc.,515 F.3d 334 (4th Cir. 2008). Yet another ramification is the
Interpretation’s potential impact on the rapidly developing “sharing economy.”
For example, under the control test, Uber could comfortably classify its
drivers as independent contractors – after all, one of the oft-touted benefits
of becoming an Uber driver is the ability to control your own hours and use
your own vehicle. But, under the economic realities standard, Uber drivers, in
light of their integral contribution to the company’s business, appear to be
more accurately classified as employees. And, this could open the doors to Uber
drivers receiving more benefits, and to the government collecting more taxes.